Prime Minister Scott Morrison has had a busy fortnight of international diplomacy. Barely had the dust settled from his performance
at the Pacific Island Forum in Tuvalu, than the prime minister announced troop commitments to the Straits of Hormuz, then fronted a delicate press conference in Vietnam speaking about the South China Sea, en route to France.
After a year in the top job, Morrison may be slowly understanding what it takes to make an impact at a global level in order to pursue Australia’s interests.
Morrison scored a rare and valuable invitation to the 45th Group of Seven (G7) Summit in Biarritz, France. The G7 membership consists of the industrialised economies of US, France, Germany, Japan, the UK, Italy and Canada, along with the Presidents of the European Union and European Commission, and usually Spain. The World Bank, IMF, OECD, African Union, ILO, African Development Bank and NEPAD are also usually invited, the UN Secretary-General was also there.
The G7 used to be the G8, but Russia is still suspended. A G8 summit had been planned for June 2014 in Sochi, Russia. But in March that some year, the the G7 members cancelled the meeting and suspended Russia’s membership of the group due to Russia’s annexation of Crimea. However, Russia has not been permanently expelled.
French President Emmanuel Macron used his invitations strategically to promote a “league of democracies” concept. He invited leaders from Australia, India, Chile and South Africa to join the outreach activities at the summit, in particular to attend a Sunday night dinner to discuss environmental challenges.
Australia is a member of the G20, which includes India, Indonesia and China. But it has often cast a wistful eye to Canada’s participation in the G7/8, despite the relative similarity in economic strength between the two nations.
This year, the Henry Jackson Society released its second Audit of Geopolitical Capability report, which assesses the geopolitical capability of the Group of 20 nations plus Nigeria. It ranked Australia as the eighth most capable in the world, ahead of India and Russia.
But since the election of Donald Trump as US president, the G7 has lost much of its consensus and related power. The 2019 summit was like an Agatha Christie play, full of shocks, tensions, surprise reveals and difficulties.
The US president walked out early from last year’s G7 summit in Canada over criticism of his tariffs policy, and then refused to sign the final statement. Macron therefore organised the summit to have a two-hour lunch alone with the president, and abandoned the idea of a final communique.
Saturday working sessions were held on jobs, global inequality, climate change and women’s empowerment, leading to criticisms from the US delegation that the agenda was too “niche”. Sunday was devoted to the extremely difficult trade discussions and the Amazon forest fires.
The European G7 nations, as well as other EU members such as Ireland and Spain, sparred over whether to block the EU-Mercosur free trade agreement unless Brazilian President Jair Bolsonaro takes forceful action on the forest fires raging in the Amazon and on climate change in general.
Trump pulled out of the Paris Climate Agreement in 2017, shortly after he attended his first G7 in Italy. Climate was still a sticking point at this summit, with leadership from the G7 unlikely on climate as an economic risk.
The Saturday dinner was thrown into uproar by Trump championing the re-entry of Russia to the G7, with the EU arguing back that Crimea would be better.
Sunday saw the surprise arrival of Iranian Foreign Minister Mohammad Javad Zarif to meet with Macron. Zarif, sanctioned by the US, said salvaging the 2015 nuclear deal would be difficult but “worth trying”.
Trump withdrew the US from the Iran nuclear accord in 2018, leaving European signatories scrambling to preserve the pact. German Chancellor Angela Merkel said she welcomed efforts toward deescalation. Europeans have so far declined to join Australia, the US, Bahrain and the UK by engaging in the Strait of Hormuz. The situation in Hong Kong was barely raised.
Just before the summit, UK Prime Minister Boris Johnson – attending his first G7 summit – and European Council President Donald Tusk traded barbs over the UK’s exit from the European Union. Tusk said he would not negotiate a no-deal scenario, and said he hoped the prime minister did not want to go down in history as “Mr No Deal”. Johnson took a swim in the sea and created a lengthy metaphor for journalists about Brexit as a result.
Most world leaders attending the summit declared they would ask the US to resolve the trade war with China. However, Trump announced additional duties on Chinese imports one day before he arrived in France. He then threatened to levy import duties on French wine “like they’ve never seen before”. The US president also said the British would lose “the anchor around their ankle” after leaving the EU.
Outside the summit, more than 9,000 anti-G7 protesters marched peacefully over a bridge linking France and Spain, about 30 kilometres from Biarritz. Yellow Jacket protesters held pictures of Macron upside-down.
In the midst of such turmoil, it would be difficult to make an impact as an invited guest. However, Morrison kept up his advocacy on the Christchurch Call.
At the close of the G7, Morrison announced an undisclosed amount of funding from the OECD and A$300,000 to fund the development of voluntary transparency reporting protocols for social media companies to prevent, detect, and remove terrorist and violent extremist content.
This was the EU President Tusk’s final G7 Summit and he reflected sadly on Saturday that leaders of the world’s richest and most powerful democracies are increasingly unable to find “common language”, and were instead at risk of getting caught up in “senseless disputes among each other”.
The summit seems to have borne out his worse fears. Hopefully Scott Morrison was inspired by the fractured state of the big stage to become part of the solution.
India’s Chandrayaan-2 spacecraft has settled into lunar orbit, ahead of its scheduled Moon landing on September 7. If it succeeds India will join a very select club, now comprising the former Soviet Union, the United States and China.
As with all previous Moon missions, national prestige is a big part of India’s Moon shot. But there are some colder calculations behind it as well. Space is poised to become a much bigger business, and both companies and countries are investing in the technological capability to ensure they reap the earthly rewards.
Last year private investment in space-related technology skyrocketed to US$3.25 billion, according to the London-based Seraphim Capital – a 29% increase on the previous year.
The list of interested governments is also growing. Along with China and India joining the lunar A-list, in the past decade eight countries have founded space agencies – Australia, Mexico, New Zealand, Poland, Portugal, South Africa, Turkey and the United Arab Emirates.
Of prime interest is carving out a piece of the market for making and launching commercial payloads. As much as we already depend on satellites now, this dependence will only grow.
In 2018 382 objects were launched into space. By 2040 it might easily be double that, with companies like Amazon planning “constellations”, composed of thousands of satellites, to provide telecommunication services.
The satellite business is just a start. The next big prize will be technology for “in-situ resource utilisation” – using materials from space for space operations. One example is extracting water from the Moon (which could also be split to provide oxygen and hydrogen-based rocket fuel). NASA’s administrator, Jim Bridenstine, has suggested Australian agencies and companies could play a key role in this.
All up, the potential gains from a slice of the space economy are huge. It is estimated the space economy could grow from about US$350 billion now to more than US$1 trillion (and as possibly as much US$2,700 billion) in 2040.
At the height of its Apollo program to land on the Moon, NASA got more than 4% of the US federal budget. As NASA gears up to return to the Moon and then go to Mars, its budget share is about 0.5%.
In space money has most definitely become an object. But it’s a constraint that’s spurring innovation and opening up economic opportunities.
NASA pulled the pin on its space shuttle program in 2011 when the expected efficiencies of a resusable launch vehicle failed to pan out. Since then it has bought seats on Russian Soyuz rockets to get its astronauts into space. It is now paying SpaceX, the company founded by electric car king Elon Musk, to deliver space cargo.
SpaceX’s stellar trajectory, having entered the business a little more than a decade ago, demonstrates the possibilities for new players.
To get something into orbit using the space shuttle cost about US$54,500 a kilogram. SpaceX says the cost of its Falcon 9 rocket and reuseable Dragon spacecraft is about US$2,700 a kilogram. With costs falling, the space economy is poised to boom.
As the space economy grows, it’s likely different countries will come to occupy different niches. Specialisation will be the key to success, as happens for all industries.
In the hydrocarbon industry, for instance, some countries extract while others process. In the computer industry, some countries design while others manufacture.
There will be similar niches in space. Governments’ policies will play a big part in determining which nation fills which niche.
There are three ways to think about niches.
First, function. A country could focus on space mining, for instance, or space observation. It could act as a space communication hub, or specialise in developing space-based weapons.
Luxembourg is an example of functional specialisation. Despite its small size, it punches above its weight in the satellite industry. Another example is Russia, which for now has the monopoly on transporting astronauts to the International Space Station.
Second, value-adding. A national economy can focus on lower or higher value-add processes. In telecommunications, for example, much of the design work is done in the United States, while much of the manufacturing happens in China. Both roles have benefits and drawbacks.
Third, blocs. Global production networks sometimes fragment. One can already see the potential for this happening between the United States and China. If it occurs, other countries must either align with one bloc or remain neutral.
Aligning with a large power ensures patronage, but also dependence. Being between blocs has its risks, but also provides opportunities to gain from each bloc and act as an intermediary.
The first space race, between the Soviet Union and the United States, was singularly driven by political will and government policy. The new space race is more complex, with private players taking the lead in many ways, but government priorities and policy are still crucial. They will determine which countries reach the heights, and which get left behind.
The possibility of blackouts affecting half of Victoria has attracted plenty of attention to a document once read only by industry insiders and policy wonks: the Electricity Statement of Opportunities.
The Statement, updated every year by the Australian Energy Market Operator (AEMO), forecasts 10-year supply and demand in the main grids that serve the Australia’s south and eastern states.
But the chance of huge blackouts is just part of the Statement – and in fact it reveals a growing tension between the market operator and the bodies that oversee electricity regulations.
So, what does the latest Statement say? The good news is AEMO calculates the expected level of “unserved energy” – that is, demand that cannot be met by supply – is likely to be fairly low, which makes blackouts unlikely.
The bad news is AEMO thinks a standard based on “expected unserved energy” is a poor way to forecast keeping the lights on.
Instead, AEMO points to the unlikely events that nonetheless could have a significant impact on consumers and says we should frame reliability obligations around those.
In its analysis of these, AEMO finds it is possible (albeit unlikely) about half of Victoria’s households could lose supply in a single event in the coming year.
So, on the one hand AEMO expects the system will basically meet the current obligations for unserved energy, but it also says there is nonetheless the possibility half of Victoria’s homes could suffer outages because of shortfalls on the main power system.
Importantly, as AEMO’s obligation is to hit the expected unserved energy standard, not beat it, it is not authorised to take actions to mitigate these outside possibilities.
To really understand the issues here, we need to look back to last year. In 2018, AEMO sought to change Australia’s energy regulations so AEMO could buy as much reserve capacity as it decided was needed to reliably manage unlikely but possible severe failures.
It also asked for the authority to buy reserves for longer periods so that it could source reserves more cheaply.
The Australian Energy Market Commission (AEMC) that sets the rules rejected this application on the basis that the standards were already high enough – maybe even too high – and AEMO was unduly risk-averse (the political risk associated with power failures made it so). By implication, left to its own devices AEMO would look after itself, at customers’ expense.
Whatever the stated rationale, underlying AEMC’s rejection of AEMO’s application is the philosophy of the sanctity of the market: wherever possible, the market is to be protected from intervention.
From the regulator’s perspective, were it to have acceded to AEMO’s request to expand the volume of reserves AEMO bought outside the market, it would be buying reserves it did not need and allowing the price signals in the market to be further undermined.
But I would argue the regulator’s decision is better characterised as protecting the National Electricity Market’s monopoly for the exchange of wholesale electricity.
It may be acceptable to force transactions through a market if there is confidence in that market. But the evidence of market failure is abundant: wholesale prices in Victoria at record highs, rampant exercise of market power, reliability concerns that often make the front page, and in certain cases shortfalls in dispatchable capacity, storage and price-responsive demand.
In its Statement, AEMO signalled it will work with Victoria’s state government to explore ways they can work together to meet Victoria’s reliability needs, in spite of the AEMC’s decision.
This is a very significant development and I envisage it will presage similar bilateral arrangements between AEMO and other states.
Should we be worried about this? Not in the least. Electricity markets do not spontaneously arise; they are administrative constructions. For too long the National Electricity Market has had a monopoly on the exchange of wholesale electricity and the AEMC has had a monopoly on its oversight. Monopolies and markets ossify when they get stuck in their originating orthodoxy and ideology.
AEMO is beginning to clear a log jam. There is a spirit of innovation and discovery in the air. This is something to welcome and it is not a moment too soon.
It’s four years since then Prime Minister Tony Abbott warned Australia had been heading to “a Greek-style economic future”.
He was referring to what he said had been happening under the previous Labor government.
When Labor left office in 2013 the federal government’s budget deficit had been 3% of gross domestic product. The Greek government’s had been 7%.
The Australian government’s debt to GDP ratio was 20%. The Greek government’s was 177%.
Australia was never on the path to becoming an economic basket case like Greece, but right now we are on the road to becoming like another European nation.
It also starts with “G”.
Becoming economically like Germany isn’t as scary. But it is genuinely troubling nevertheless.
Germany’s GDP growth in the June quarter was minus 0.1%. That means economic activity shrank.
Its central bank, the Bundesbank, doesn’t see things getting better any time soon, saying growth “is probably set to remain lacklustre in the third quarter of 2019”.
Interest rates have fallen so low that investors are now paying the German government to take their money. The nominal interest rate on 2-year German government debt is -0.90%, and on extremely long-term 30-year bonds is -0.15%.
That’s right: even for 30 years into the future, investors think its safer to lose money by parking funds with the German government than to try to make money by using them in other investments.
Put another way, markets think the German economy will be in trouble for decades, meaning short-term German interest rates will have to remain ultra-low for decades.
The German penchant for balanced budgets became (there’s really no other way to put it) fanatical in the wake on the financial crisis of 2008.
Like centre-right governments around the world – Britain was a leading example – a dark fiscal austerity took hold, at precisely the wrong time.
2009 was a time of chronically weak private demand that required both lower interest rates and, as monetary policy was running out of steam, continuing budget deficits.
Instead Germany cut government spending, pushing the budget back into surplus
It didn’t get everything wrong.
As I wrote at the time, Germany was largely right to insist that Greece get its out-of-control spending and government debt under control.
But Germany’s approach to its own economy hurt it and other European economies such as Italy and Spain.
With apologies to British 1980s band The Vapors, we’re at risk of “Turning Germanese”.
Like Germany, our interest rates are getting close to zero. OK, Germany has negative nominal 30-year interest rates, but we’ve got negative real 10-year bond interest rates, and zero 30-year bond rates.
Both of our major political parties are gripped by balanced-budget fetishism, appearing to want to balance the budget regardless of the economic context.
Again, here we are not quite as fanatical as Germany, but Labor seems determined to “out-surplus” the Coalition to prove its economic management credentials. And the government has made delivering a surplus the centrepiece of its economic agenda.
And, like in Germany, our economic growth is slowing. We don’t yet have negative GDP growth like in Germany, but we do have negative per capita GDP growth.
Poor old Reserve Bank governor Philip Lowe has been pleading over and again for more aggressive government spending, particularly on infrastructure, to help complement what he is doing on interest rates.
A couple of cheesy photo ops with Treasurer Josh Frydenberg aside, there’s no evidence of him gaining any traction in Canberra.
Structurally balanced budgets are important, and thinking government debt doesn’t matter is deeply misguided.
But this is the situation we face:
private demand is chronically weak
our physical infrastructure has not kept pace with population growth and modern needs
our social infrastructure (including all levels of education) is not up to standard
interest rate cuts are running out of puff
the government can borrow in its own currency, long-term, for close to nothing
Any government that won’t borrow and spend up big and smart in these circumstances is making a huge mistake – one for which we and our children will pay dearly.
If we’re not careful the old Abbott narrative of “we’re about to become Greece” will become true, except about another country whose shoes we would rather not be in.
We’ve become used to each new generation of Australians enjoying a better standard of living than the one that came before it. Until now. Today’s young Australians are in danger of falling behind.
A new Grattan Institute report, Generation gap: ensuring a fair go for younger Australians, reveals that younger generations are not making the same economic gains as their predecessors.
Economic growth has been slow for a decade, Australia’s population is ageing, and climate change looms. The burden of these changes mainly falls on the young. The pressures have emerged partly because of economic and demographic changes, but also because of the policy choices we’ve made as a nation.
For much of the past century, strong economic growth has produced growing wealth and incomes. Older Australians today have substantially greater wealth, income and expenditure compared with Australians of the same age decades earlier.
But, as can be seen from the yellow lines on this graph, younger Australians have not made the same progress.
The graph shows that the wealth of households headed by someone under 35 has barely moved since 2004.
It’s not young people’s spending habits that are the problem – this is not a story of too many avocado lattes (and yes, they are a thing).
In fact, as the graph below shows, while every age group is spending more on essentials such as housing, young people are cutting back on non-essentials: among them alcohol, clothing, furnishings and recreation.
Wage stagnation since the global financial crisis and climbing underemployment have hit young people particularly hard. Older people tend to be better cushioned because they have already established their careers and are more likely to have other sources of income.
If low wage growth and fewer working hours becomes the “new normal”, we are likely to see a generation emerge into adulthood with lower incomes than the one before it.
Budget pressures will exacerbate these challenges.
Australia’s tax and welfare system supports an implicit generational bargain. Working-age Australians, as a group, are net contributors to the budget, helping to support older generations in their retirement.
They’ve come to expect that future generations in turn will support them.
But Australia’s population is ageing – which increases the need for government spending on health, aged care and pensions at the same time as there are relatively fewer working age people to pay for it.
Demographic bad luck is one thing (some generations will always be larger than others) but policy changes are making the burden worse.
A series of tax policy decisions over the past three decades – in particular, tax-free superannuation income in retirement, refundable franking credits, and special tax offsets for seniors – mean we now ask older Australians to pay a lot less income tax than we once did.
Disturbingly, these and other changes mean older households now pay much less tax than younger households on the same income.
Added to this have been substantial increases in average pension and health payments for households over 65.
It has meant that net transfers – government benefits minus taxes – have dramatically increased for older households but not for younger ones.
The overall effect has been to make current working Australians increasingly underwrite the living standards of retirees.
A typical 40-year-old today contributes much more towards the retirement of others through taxes than did his or her baby boomer predecessors.
As it happens, it is also more than the typical 40-year-old is contributing to his or her own retirement through compulsory super.
Most Australians want to leave the world a better place for those that come after them.
It’s time to make sure we do it.
Lots of older Australians are doing their best, individually, supporting their children via the “Bank of Mum and Dad”, caring for grandchildren, and scrimping through retirement to leave their kids a good inheritance.
These private transfers help a lucky few, but they don’t solve the broader problem. In fact, inheritances exacerbate inequality because they largely go to the already wealthy.
We need policy changes.
Reducing or eliminating tax breaks for “comfortably off” older Australians would be a start.
Boosting economic growth and improving the structural budget position would help all Australians, especially younger Australians. It would also put Australia in a better position to tackle other challenges that are top of mind for young people, such as climate change.
Changes to planning rules to encourage higher-density living in established city suburbs would help by making housing more affordable.
Just as a series of government decisions have contributed to the challenges facing young people today, a series of government decisions will be needed to help redress them.
Every generation faces its own unique challenges, but letting this generation fall behind the others is surely a legacy none of us would be proud of.
It’s time to share the burden, and perhaps an avocado latte while we’re at it.
Treasurer Josh Frydenberg has issued a timetable for the government’s dealing with the recommendations from the royal commission into banking, superannuation and financial services, which aims to have all measures needing legislation introduced by the end of next year.
The opposition has accused the government of dragging its feet on putting into effect the results of the inquiry, which delivered its final report early this year.
“The need for change is undeniable, and the community expects that the government response to the royal commission will be implemented swiftly,” Frydenberg said in a statement on the timetable.
Fydenberg said that in his final report Commissioner Kenneth Hayne made 76 recommendations – 54 directed to the federal government (more than 40 of them needing legislation), 12 to the regulators, and 10 to the industry. Beyond the 76 recommendations, the government had announced another 18 commitments to address issues in the report.
The government had implemented 15 of the commitments it outlined in responding to the report, Frydenberg said. This included eight out of the 54 recommendations, and seven of the 18 additional commitments the government made. “Significant progress” had been made on another five recommendations, with draft legislation in parliament or out for comment or consultation papers produced.
Frydenberg said that, excluding the reviews to be conducted in 2022, his timetable was:
by the end of 2019, more than 20 commitments (about a third of the government’s commitments) would have been implemented or have legislation in parliament
by mid 2020, more than 50 commitments would have been implemented or be before parliament
by the end of 2020, the rest of the commission’s recommendations needing legislation would have been introduced.
When the Hayne report was released early this year, the government agreed to act on all the recommendations.
But one recommendation it has notably not signed up to was on mortgage brokers.
Hayne found that mortgage brokers should be paid by borrowers, not lenders, and recommended commissions paid by lenders be phased out over two to three years.
The government at first accepted most of this recommendation, announcing the payment of ongoing so-called “trailing commissions” would be banned on new loans from July 2020. Upfront commissions would be the subject to a separate review. Four weeks later in March Frydenberg announced the government wouldn’t be banning trailing commissions after all. Instead, it would review their operation in three years.
Releasing the timetable, Frydenberg said the reform program was the “biggest shake up of the financial sector in three decades” and the speed of implementation “is unprecedented”.
“It will be done in a way that enhances consumer outcomes with more accountability, transparency and protections without compromising the flow of credit and competition,” he said.
He undertook to ensure the opposition was briefed on each piece of legislation before it came into parliament.
“This will begin with the offer of a briefing by Treasury on the implementation plan. Given both the government and opposition agreed to act on the commission’s recommendations, we expect to achieve passage of relevant legislation without undue delays,” he said.
He said the industry was “on notice. The public’s tolerance has been exhausted. They expect and we will ensure that the reforms are delivered and the behaviour of those in the sector reflects community expectations.”
Reserve Bank Governor Philip Lowe has said two things about unemployment in the past few weeks. Together, they lead to an inescapable conclusion.
Lowe said in May that while the Reserve Bank had long thought an unemployment rate of 5% was the best that could be achieved without generating worrying inflation, that view has now changed:
From today’s perspective, I think we can do better than this. My judgement of the accumulating evidence is that the Australian economy can support an unemployment rate of below 5% without raising inflation concerns.
It was good news. And then it got better.
In June he put a number on how low the unemployment rate could go before inflation became a concern:
While it is not possible to pin the number down exactly, the evidence is consistent with an estimate below 5%, perhaps around 4.5%. Given that the current unemployment rate is 5.2%, this suggests that there is still spare capacity in our labour market.
The Reserve Bank should be able to cut interest rates until unemployment fell below 5% and approached 4.5% without worrying about inflation, Lowe argued.
And in May, in a report back from a board meeting, he made it clear that’s what he would do:
At that meeting, we discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5% mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate.
It would likely be appropriate to cut interest rates and keep cutting until the unemployment rate was driven below 5%, continuing to cut until it approached 4.5%.
Today, appearing before the House of Representatives economics committee in Canberra with the unemployment rate still stuck at 5.2% despite two consecutive rate cuts, he delivered what on the face of it was bad news.
He said the bank’s central forecast was that the unemployment rate would stay above 5% again until 2021. That’s right, 2021.
But taking the two statements together, it is reasonable to conclude that the Reserve Bank will keep cutting rates until unemployment does fall below 5%. In other words, it will keep cutting rates until 2021.
Indeed, the Reserve Bank’s quarterly forecasts update, released as Lowe spoke, countenances that happening. As foreshadowed by the governor, it forecasts that the unemployment rate won’t fall back to 5% until June 2021.
And it contains several other unwelcome forecasts: economic growth of just 2.5% this year, down from a previously forecast 2.75%, and very weak inflation this year of just 1.75%, down from a previously forecast 2%.
But here’s the thing. All of those forecasts were compiled, as is the Reserve Bank’s custom, by taking into account not only the two interest rate cuts that have already happened (and have taken the bank’s cash rate down to an all-time low of 1%), but also two more yet to be delivered.
It is explained in the footnote:
Technical assumptions set on 7 August include the cash rate moving in line with market pricing.
The “market pricing” is the consensus of the bets placed on the futures market for what the Reserve Bank is going to do to its cash rate.
The consensus is for another cut of 0.25% in October and then another cut of 0.25% in February, taking the cash rate down to yet another all-time low of just 0.5%.
The Reserve Bank is normally at pains to point out that this is a mere technical assumption, not a guarantee of how it will move rates. But the awful truth is that its forecasts imply that unless it cut rates two more times in coming months, unemployment won’t fall to 5% by 2021, and inflation will be even weaker than the incredibly weak 1.75% it is forecasting.
Two more cuts in its cash rate will take it to 0.5%, close to zero.
Lowe revealed that the Reserve Bank is investigating so-called “unconventional” monetary policy or quantitative easing that would have the same effect as taking the cash rate below zero.
“It is prudent for us to have done the work in advance to see what we would do – it’s really contingency planning,” he said.
Rates might go to zero, or below, worldwide because right now there is a worldwide glut of savings, and not enough investment.
The reality we face is that, if a lot of people want to save and not many people want to use those savings to build new capital, savers are going to get low returns. We can move our interest rates around this new structurally lower level,but we can’t escape the fact that global interest rates are low.
The Reserve Bank’s best case is that its Australian forecasts are wrong – that unemployment actually falls and that inflation, wage growth and economic growth climb.
There’s a respectable view within the bank that this might happen. Its forecasts take into account a range of positive influences, including lower interest rates, the recent tax cuts, the depreciation of the Australian dollar, a brighter outlook for investment in the resources sector, some stabilisation in the housing market, and ongoing high levels of investment in infrastructure.
But they are the result of a mechanical model that takes them into account individually. The governor’s hope is that, taken together, they will achieve more than is forecast.
He would like governments themselves to push things along, starting with the wages they pay their own employees, and he is becoming ever more bold about saying so:
Most public sectors have wage caps of 2.5%, some have 1.5%, I think in Western Australia it’s probably even lower. I can understand why governments are doing that. On the other hand, the wage caps in the public sector are cementing low wage norms across the country. Over time, I hope the whole system, including the public sector, could see wages rising at three point something.
He is as good as powerless to stop what he regards as a worldwide investment strike caused by the trade and technology disputes between the United States and China.
These disputes pose a significant risk to the global economy. Not only are they disrupting trade flows, but they are also generating considerable uncertainty for many businesses around the world. Worryingly, this uncertainty is leading to investment plans being postponed or reconsidered.
Lowe doesn’t believe further interest rate cuts would to do much to encourage businesses to invest, or to encourage home buyers to borrow.
But he is certain they will help in other ways.
They will lower the exchange rate, making Australian goods and services more competitive, and that they will free up the cash of Australians who already have home loans, what he calls the “cash flow” channel:
There is no evidence that has become less effective. It is certainly true that in the current environment, at least in my view, monetary policy is less effective than it used to be. In today’s environment people don’t run off to the bank to borrow more when interest rates fall; they are more likely to pay back their mortgage more quickly. So that dynamic is different than it used to be.
When he last appeared before the parliamentary committee in February he said the probabilities of rates going up and rates going down were evenly balanced. He didn’t say that today.
Scott Morrison has flagged the government is working with the United States and Britain on details for an Australian role in helping safeguard shipping passages in the Middle East.
Morrison told a news conference in Townsville on Thursday he had spoken to British Prime Minister Boris Johnson on Wednesday night and “indicated to him that we were looking very carefully at our participation in this initiative”.
Morrison stressed it would be a multinational operation.
This is not a unilateral initiative by any one country, and it is about safe shipping lanes, it is about deescalating tensions and making sure that the current situation does not worsen.
He said the government had not “made any decisions on this yet. We want to be fully satisfied about the operational arrangements that are in place”. It was very early days and it would be a while before things came together.
In practice though, the government has obviously agreed in principle, subject to satisfactory arrangements being worked out. Its role is somewhat complicated, however, by the fact it does not have a ship in the region.
The US’s request for Australian assistance was discussed at the weekend AUSMIN talks.
Morrison said there were other countries which were in a similar position to Australia – “engaging before making any full decisions”.
He stressed the maritime issue “should be clearly divorced from the broader issues that relate to Iran and the JCPOA [Joint Comprehensive Plan of Action – the nuclear deal that the US pulled out of last year].
“That’s a separate issue. This is about safe shipping lanes and ensuring that we can restore at least some stability to what is a very unstable part of the world at the moment,” Morrison said.
“There has been a very disturbing series of events that we’ve seen in the Straits of Hormuz, and freedom of navigation and safe shipping lanes is very important to the global economy and that is a matter that is as important in that part of the world as it is in many other parts of the world.”
The Chinese authorities have accused Liberal MP Andrew Hastie of “Cold-War mentality and ideological bias”, after he drew on the example of France’s “catastrophic” failure to comprehend the threat of a rising Nazi Germany in an article warning about the dangers from a rising China.
Hastie, chair of the powerful parliamentary joint committee on intelligence and security, wrote in the Sydney Morning Herald:
The West once believed that economic liberalisation would naturally lead to democratisation in China. This was our Maginot Line. It would keep us safe, just as the French believed their series of steel and concrete forts would guard them against the German advance in 1940. But their thinking failed catastrophically. The French had failed to appreciate the evolution of mobile warfare. Like the French, Australia has failed to see how mobile our authoritarian neighbour has become.
Even worse, we ignore the role that ideology plays in China’s actions across the Indo-Pacific region. We keep using our own categories to understand its actions, such as its motivations for building ports and roads, rather than those used by the Chinese Communist Party.
The West has made this mistake before. Commentators once believed Stalin’s decisions were the rational actions of a realist great power.
Hastie referred to action Australia had taken such as foreign espionage legislation and more closely monitoring infrastructure.
But “right now our greatest vulnerability lies not in our infrastructure, but in our thinking. That intellectual failure makes us institutionally weak. If we don’t understand the challenge ahead for our civil society, in our parliaments, in our universities, in our private enterprises, in our charities — our little platoons — then choices will be made for us. Our sovereignty, our freedoms, will be diminished.”
A spokesperson for the Chinese embassy said in a statement:
We strongly deplore the Australian federal MP Andrew Hastie’s rhetoric on “China threat” which lays bare his Cold-War mentality and ideological bias. It goes against the world trend of peace, cooperation and development. It is detrimental to China-Australian relations.
History has proven and will continue to prove that China’s peaceful development is an opportunity, not a threat to the world.
We urge certain Australian politicians to take off their “colored lens” and view China’s development path in an objective and rational way. They should make efforts to promote mutual trust between China and Australia, instead of doing the opposite.
Morrison played down the Hastie comments, noting he was a backbencher not a minister.
We will continue to work to have a cooperative arrangement with China. Of course, there is much to be gained from that relationship, particularly from the trade side, but let’s not forget that relationship is far broader than just the economic one.
But equally, our relationship with the United States is a very special one indeed and there is a deep connection on values and that’s of no surprise to anyone.
So we believe we can continue to manage these relationships together, but I don’t think anyone is in any way unaware of the challenges that present there.